Safest way to invest 25k?

I currently have about 25k sitting in a money market account at my
local bank. The rate is 3.5%. I've been doing some research and have
noticed that some online accounts are yielding higher rates of
typically 5%+. I was considering moving this money to one of the
higher rate online accounts just to take advantage of the better
return. Would this be a worthwhile move? In addition to the 25k, we
have about 7k in bill pay/misc expense money that we keep liquid for
everyday purposes. Since I'm not really looking to get involved in any
high risk investing, I would like to know if the money market is my
best bet for what I need? I know that I could look into CDs but it
seems to me right now with the money market rates being relatively
high, it makes more sense to keep the money liquid in a money market
rather than tying it up in a CD.

Some background that will hopefully help: I am 26 years old, married,
with no children (maybe in the future). My wife and I have a combined
annual income of about 70k gross. We both have company 401ks (two
different companies) that we are contributing the maximum matching
percentage each month. We do not have any IRAs. We do not have any
credit card debit. We do have a mortgage of 91k for a house we
purchased last year. We have about 60k combined in school loans and
one car loan of 23k. We usually contribute about $500 to our savings
account each month.

My priority is to get the most for my money in saving for the future.
One question I have is related to taxes. I haven't had a chance to
consult my accountant yet but one issue I see with money market
accounts is the fact that they are taxable, correct? So if my annual
return is 1k, 20%+ of that is going to be subject to taxes? Taking the
tax issue into consideration, are there other avenues I should be
persuing that may be lower percentage yields but are not subject to
tax...gov't bonds, etc? Or in the end it typically balance out?

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Josh B. wrote:
> I currently have about 25k sitting in a money market account at my
> local bank. The rate is 3.5%. I've been doing some research and have
> noticed that some online accounts are yielding higher rates of
> typically 5%+. I was considering moving this money to one of the
> higher rate online accounts just to take advantage of the better
> return. Would this be a worthwhile move? In addition to the 25k, we
> have about 7k in bill pay/misc expense money that we keep liquid for
> everyday purposes. Since I'm not really looking to get involved in any
> high risk investing, I would like to know if the money market is my
> best bet for what I need? I know that I could look into CDs but it
> seems to me right now with the money market rates being relatively
> high, it makes more sense to keep the money liquid in a money market
> rather than tying it up in a CD.
>

Buy some 4-week and 13-week treasuries also, and roll them over into
26's when they mature. That way, you don't have all your money tied up
for 6 months; part of it will always by maturing in another month or two.

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"Josh B." <> writes:
> I currently have about 25k sitting in a money market account at my
> local bank. The rate is 3.5%. [snip]
>
> Some background that will hopefully help: I am 26 years old, married,
> with no children (maybe in the future). My wife and I have a combined
> annual income of about 70k gross. We both have company 401ks (two
> different companies) that we are contributing the maximum matching
> percentage each month. We do not have any IRAs. We do not have any
> credit card debit. We do have a mortgage of 91k for a house we
> purchased last year. We have about 60k combined in school loans and
> one car loan of 23k. We usually contribute about $500 to our savings
> account each month.

If you are looking for a high-rate, "safe" investment, your best bet
right now is one of the online bank savings accounts. Some of them
are paying over 5% nowadays, and they are completely insured.

OTOH, if it were me, I'd use the money to pay off the car loan instead.
As a homeowner, you need an emergency fund, but getting rid of one of your
big monthly expenses means you can save more quickly and need less of a
savings cushion. I'd also start using some of your savings to fund
Roth IRAs for both you and your wife.

Some quick Q's - what interest rate you are paying on your student
loans? Is there a pre-payment penalty on those? (If so, what is it?)
The reason I ask is that usually interest you pay is higher than
interest you earn, so your best use of funds may be to pay down the
loans.

CD's and money market funds are taxable as ordinary income both
Federal and State. Clearly the higher the rate, the higher the
after-tax return, but getting the actual after-tax return is
complicated by interactions of all factors involved. I recommend
getting a piece of tax software to get more accurate numbers for
different scenarios. E.g. your student loans are probably tax
deductible, and I wonder if your tax rate is 20%. Tax software usually
runs about $50 bucks, but you can use it to get decent estimates for a
couple of years, and since most State forms are simple once you have
Federal you don't need to pay the $15 (or whatever) for the State
software.

It sounds like you want to put together a pretty comprehensive
long-term picture of your finances (which is GOOD!). Tax software will
estimate after-tax effects, but won't incorporate savings plans and so
forth, so you should work on a spreadsheet going forwards 20-30 years -
those numbers will be pretty rough estimates of what actually happens,
but will give you a sense of direction.

"Josh B." <> wrote
> We do not have any
> credit card debit. We do have a mortgage of 91k for a
> house we
> purchased last year. We have about 60k combined in school
> loans and
> one car loan of 23k.

Generally, when the interest rate of a loan exceeds the
expected return one could "safely" get through investing in
stocks or CDs etc., the superior investment is to pay off
the loan.

Josh B. wrote:
> I currently have about 25k sitting in a money market account at my
> local bank.

In addition to the 25k, we
> have about 7k in bill pay/misc expense money that we keep liquid for
> everyday purposes. Since I'm not really looking to get involved in any
> high risk investing,
>
> Some background that will hopefully help: I am 26 years old, married,
> with no children (maybe in the future). My wife and I have a combined
> annual income of about 70k gross. We both have company 401ks (two
> different companies) that we are contributing the maximum matching
> percentage each month. We do not have any IRAs. We do not have any
> credit card debit. We do have a mortgage of 91k for a house we
> purchased last year. We have about 60k combined in school loans and
> one car loan of 23k. We usually contribute about $500 to our savings
> account each month.
>
> My priority is to get the most for my money in saving for the future.
>

Snipped for brevity.

7k emergency is about one months "gross pay"- how many months expenses
is this for you?

If taxes (or tax avoidance) is the primary concern, my two best choices
would be
1) increase 401k contribution percentage
2) Open a Roth IRA

My "rules of thumb" suggest 401k should be 10% for each- you and your
wife- but this is another topic discussed in numerous threads.

There was a point in a few other responses about paying off student
loans and the car. I agree with these comments. I would add to that a
question- you owe 91k on your mortgage, how much of house do you own?
(Is it more or less than 20%)?

Why are you "saving" $500/month- do you have a reason for this mkoney
being set aside? Maybe a vacation, bigger house or other reason? If
you don't "know" what this money is for, then it may be difficult to
suggest to many alternatives (Money Market vs CDs vs Other).

Since I just bought the house last year and the car this year, I do not
have much equity in either. The rate on the car is 6%, house is 5.5%,
and we've consolidated our school loans so they are fixed at 3.5%. The
$500 is money left over after we pay all our monthly expenses. On the
car, house, and student loans, we have been paying above what is due
which would work out to be one additional payment each year for each of
those expenses. So to answer one of the questions, there is no
prepayment penalty on any of our current long term expenses. We haven't
been saving the 25k for any particular cause, more just as insurance
for any future expenditures. I know that my best course of action
would be to pay off the car, or pay down the house or student loans.
But I personally feel more comfortable with having that money liquid
just in case there is any reason that I need it. I understand that the
low yields that I earn on the 25k won't counter the interest that I'm
paying on my expenses, but I think I've done pretty well at getting
decent fixed rates so that the interest isn't killing me...guess I just
accept the fact that the interest, even over long term, is the cost of
doing business. So with that being said, are the CDs, MMA, and t-bills
my best options?

Josh B. wrote:
> Thanks for the responses thus far.
>
> Since I just bought the house last year and the car this year, I do not
> have much equity in either. The rate on the car is 6%, house is 5.5%,
> and we've consolidated our school loans so they are fixed at 3.5%. The
> $500 is money left over after we pay all our monthly expenses.

A possible alternative perspective:

would the 25k pay off

a) all of the car?
b) all of the student loan?
c) both?

You are saving $500 per month already.

If the car was paid off add the amount (or payment) into this. I
assume payment is around $500.
If the student loans are paid off, add the amount (of payment) into
this. I assume this payment is around $300-$500.

$1500/month will get you back to 25k savings in less than 20 months,
closer to 16 months.

The risk of using the savings to pay down principle exists for 16
months. If something bad happens (within 16 months) you would have

a) your 7k "cash"
b) less debt to worry about
c) more disposable income to deal with issue

I am not suggesting you need to pay off any of the debts, and if one
was paid off first, I would choose the car. 3.5% is cheap money on the
student loans. If the repayment term is around 20 years, I might
emphasize paying off loans sooner (relative to car). This is an
alternative idea, I am not recomending or discouraging this, just
giving a "what -if".

I see. Sometimes some stuff a little less organized than yours gets
posted

The toss up is the current and future yield curve. It has been puzzling
a lot of people. Compared to two years ago, interest rates look good
right now. Compared to long term historical, they are still below
average - not by much. The general conventional investment wisdom I
have been exposed to, is to stay short-term when rates are rising, and
to lengthen maturities when yields are falling. "Today's" environment
is puzzling because the Fed raises, and rates fall. Go figure.
Generally an inverted yield curve presages a drop in interest rates,
but it's been inverting on and off for two years now. Go figure some
more.

IF you avoid commissions on T-Bills (earlier thread indicated that
buying at auction avoids all commissions), I'd recommend six month
bills - to try to maximize your returns. You could do a small ladder -
12k in 6 mo. and 13k in one year notes. Commissions are important when
dealing with T-Bills.

Money market yields have been dropping, and may drop further.www.bigcharts.com is a useful resource, and the symbol for short term
rates is IRX. The five-year Bills are FVX. The US Treasury site gives
you last auction numbers and dates.

My personal take is that the extra 1%+ in Bills may not be worth the
convenience of a money market fund.(For six months, that's what? about
$125 bucks - buy a couple of candles $3, and have a **priceless**
dinner at home twice a month instead of your restaurant, and you've
made it up.) But make sure you have a good MM fund at a
well-capitalized financial institution.

The one mistake I think I see in your post is your estimated 20% tax
rate. Check on that with some tax software, and run some spreadsheets
for long range plans. As Yogi Berra said (paraphrased): if you don't
know where you're going, you have to be careful, because you might not
get there. Having a carefully worked out long range plan I think in
your case will far outweigh the next year's fluctuations in interest
rates.

Hope you find time to stick around and participate some more in this
forum.

Also just to add...7k in emergency would last two months with our
current spending pattern. Total owed on the car is actually 19k as we
put 4k down...tried to get 20% down on the car so I wouldn't get upside
down on the loan. Not that it matters cause all cars depreciate
significantly but it is a Honda Accord so I plan to hold on to it even
after it is paid off. If for some reason I would need to unload it, I
should be far enough ahead on it so I don't take a huge loss.

>From all you've said, maybe ramp up the (6% interest)
payments on the car but do not pay it off. I agree about
bolstering your emergency fund. The rational decision on the
other debt is to not pay them off right now, AFAIC,
especially the low rate student loan. You get the tax break
on the mortgage. In the FWIW department, much is said of the
emotional advantages of having no debt. When you reach the
point where you just hate making payments and being "owned"
by anyone, pay off the student loan etc. It won't be a
financially rational decision, but lots of folks do this.

Some online banks with high yields that come up here and at
other financial fora are EmigrantDirect and INGDirect. Check
the details (especially whether the rates are promotional)
and strings attached like minimum required; other fees; etc.

On municipal MM funds and taxable MM funds: Yes, both are
available, and your suspicions are correct. Municipal MM
funds have an "effective yield" that competes well with the
taxable MM funds. E.g. one Fidelity municipal MM fund is
yielding 3.2% while a taxable fund is yielding 4.97%. After
federal taxes, you'd net 0.8(4.97) = 3.98% on the taxable
fund. Even with state taxes, it might likely be a wash.

The best short term rates are going to be plentiful and
similar. One's local bank tends not to have the best short
term rates.

Consider a Vanguard or Fidelity account to get their very
competitive money market rates and excellent brokerage,
FDIC-insured, short term CD offerings. One day when you open
a Roth IRA, you will then have some experience with Vanguard
or Fidelity and can strongly consider them to hold your
Roth, especially in anticipation of buying mutual funds and
stocks within your Roth IRA.

Josh B. wrote:
> Thanks for the responses thus far.
>
> Since I just bought the house last year and the car this year, I do not
> have much equity in either. The rate on the car is 6%, house is 5.5%,
> and we've consolidated our school loans so they are fixed at 3.5%. The
> $500 is money left over after we pay all our monthly expenses.

I'd not pay an extra dime right now on the car. You can find CDs over 5%
and yield more than the 3.5% SL cost after tax. Accelerating the car
payment is a good idea if there's no prepayment cost.
I'd consider funding IRAs for you two. If you can open a Roth, you can
put $4K/yr right now, and invest it as you are comfortable. Compounding
the return tax free till retirement, you'll find the Roth to be a great
account to have opened. Also, good as an estate planning tool as your
heirs can take their withdrawals tax free as well.

You can find CDs 6mo 5.31%, 1 yr 5.15%, and break up the 25K into 2 or 3
separate chunks, different maturities, adding to each as they become due.
JOE

In article <>,
"Josh B." <> wrote:
> Thanks for the responses thus far.
>
> Since I just bought the house last year and the car this year, I do not
> have much equity in either. The rate on the car is 6%, house is 5.5%,
> and we've consolidated our school loans so they are fixed at 3.5%. The
> $500 is money left over after we pay all our monthly expenses. On the
> car, house, and student loans, we have been paying above what is due
> which would work out to be one additional payment each year for each of
> those expenses. So to answer one of the questions, there is no
> prepayment penalty on any of our current long term expenses.
[stuff deleted]

What I would do:
Open Roth IRA accounts for both of you and stick 4K in each. Set aside
another 10K toward emergencies and build it up to at least 4 months of
expenses over the next year or two. Save the rest for adding to the Roth
accounts in 2007.
--
Chainyanker

While I've enjoyed reading the sophisticated strategies for maximizing
return on Josh's cash reserve, sometimes I think we get a little carried
away here.

Josh's $19K car loan is costing him SIX PERCENT in AFTER TAX dollars. He
has $25K in hand and he's looking for the "safest" way to invest it.

In my view it's a no-brainer. Pay off the car loan. There is no easier and
safer way to make a guaranteed six percent after tax. Once he does that,
he can come back and ask for advice on how to invest the extra cash he's
not paying on the car every month.

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